1 Harley-Davidson Motorcycle Company was established in 1903 by William Harley and Walter, William, and Arthur Davidson, who

built their first three motorcycles in a shed in Milwaukee. Today Harley-Davidson Inc., an employer of 4,694 workers, consists of Harley-Davidson Motor Company based in Milwaukee, Wisconsin. The first Harley-Davison dealer opened in 1903 and since that time has built a network of more than 1,300 dealers determined to fulfill the dreams of their customers around the world. Some dream of their first or next motorcycle. For others, its the motorcycle tour of a lifetime to far-flung destinations. Harley-Davidson has the enviable job of making dreams a reality. Harley-Davidson primary product is the sale of motorcycles, however Harley has capitalized on the sale of accessories, clothing and financing (HarleyDavison Company). At the very heart of Harley-Davidsons success is the intricate balance between growing value and strengthening the brand. Year after year the company has generated record revenue and earnings, and more than twenty percent return on equity. Working a seamless balance, Harley-Davidsons profitability, along with its priceless brand, fuel exciting new products to complete the entire riding experience that ignite and fulfill dreams to its customers. Together, they create a passionate following and ensure the Companys legacy for many years to come (Harley-Davidson Company). When the U.S. Markets closed on 1 October, 2004, Harley-Davidson (NYSE:HDI) Quote last trade 4:00PM was $60.54 up 0.27%. Harley-Davidson showed a 52wk high / low range $44.57 - $63.75 with a volume of 1,106,200 and an Avg. Vol. (3m) reported at 1,377,173. The primary promotional tool for Harley-Davidson motorcycles are the Harley Owners Group (H.O.G.) activities. Not only does it serve as a customer relations device, but as a way to showcase and demonstrate new products.

2 In 1983, the company developed a trademark licensing program which provides income for dealers and the factory while expanding the total Harley experience. Harley has capitalized on the fact that its product image is chic. The company started to advertise in magazines geared toward the public. Clothes sold in stores such as Bloomingdales and J.C. Penny exposes Harley-Davidson to people who may not have thought about visiting a dealership. When Harley-Davidson was formed, it only offered one color of motorcycle gray and three basic styles. The company learned that it needed to give customers a choice and now offers a variety of models, including Sportsters, Super Glides, Low Riders and Tour Glides in numerous vivid colors. Many of these models and changes were developed when Harley realized their customers were customizing the bikes and none of the revenue from the work was going to the company. Harley-Davidson is driven by a constant vision of what an excellent company should be: one that is never satisfied with the status quo but is always searching for ways to do things better. This is best exemplified by a managers comment; the day we think weve arrived is the day we should all be replaced by managers of greater vision (Harley-Davidson Company). Continuous improvement demands involvement from employees and how to align employee motivation with company goals. In HarleyDavidsons case, all employees take part in a gain-sharing program and are paid cash incentives for attaining and maintaining quality, profitability and product delivery goals. In 1995, more than 2,000 of Harleys 4,694 employees took training and education programs from the Harley-Davidson Learning center.

Profitability of a company is measured using the calculations, Return on Investment (ROI) and Return on Equity (ROE). Rate of return is a universally accepted

3 measure of profitability. The large dollar amounts reported on the financial statements of many companies, and the varying sizes of companies, make ratio analysis the only sensible method of evaluating the various financial characteristics of a company (Marshall, McManus & Viele, 2004, p. 67). Because it is a ratio, profitability of unequal investments can be compared; risk/reward relationships can be evaluated. All investors evaluate the profitability of an investment by making a rate of return calculation. The ROI of a firm is significant to most financial statement readers because it describes the rate of return management was able to earn on the assets that it had available to use during the year. ROI is the label usually assigned to the rate of return calculation made using data from financial statements. This ratio is sometimes referred to as the return on assets and is the key measure of profitability (Marshall, McManus & Viele, 2004, p. 69). I determined that my companies ROI is 17.3%, A rule of thumb useful for putting ROI in perspective is that, for most American merchandising and manufacturing companies, average ROI based on net income normally ranges between 8% and 12% (Marshall, McManus & Viele, 2004, p. 72). Owners and others are interested in expressing the profits of the firm as a rate of return on the amount of owners equity: this is called ROE. I determined that my companies ROE is 14.7%, A rule of thumb for putting ROE in perspective is that average ROE for most American merchandising and manufacturing companies has historically ranged from 10% to 15%. ROE is important to current stock holders and prospective investors because it related earnings to owners investments, that

is, the owners equity in the assets of the entity (Marshall, McManus & Viele, 2004, p. 73).

4 Other Profitability measures include the Price/Earning ratio (P/E Ratio), Dividend yield and Dividend payout ratio. The price earning ratio, or simply the P/E ratio, is calculated by dividing the market price of a share of common stock by the earnings per share of common stock. The P/E ratio is used extensively by investors to evaluate the market price of a companys common stock relative to that of other companies and relative to the market as a whole. To understand the significance of the P/E ratio, individuals invest to make money, It is anticipated that return on investments will be realized in two ways: (1) the firm will pay cash dividends and (2) the market price of the firms stock will increase. The change in the market value is usually called a capital gain or loss. A rule of thumb for putting the price/earning ratio in perspective is that for the common stock of most merchandising and manufacturing companies, average P/E ratio have historically ranged from 12 to 18 (Marshall, McManus & Viele, 2004, p. 383). Using this formula I have determined that my company P/E is $24.02. I took the price of the stock @ $60.54 divided it by the earnings per share $2.52 and determined that for every $24.02 invested, the investor made 1 dollar, this is an above average figure and shows an exceptional return. The dividend yield (DY) expresses part of the stockholders ROI: the rate of return represented by the annual cash dividend. This is calculated by dividing the annual dividend by the current market price of the stock. Using this calculation I have determined that my company DY is 4.1%. The dividend yield would be compared to the yield available on alternative investments to help the investor

evaluate the extent to which the investment objectives were being met. The average dividend yield on common stocks has historically been in the price range of 3% to 6%. Dividend payout ratio expresses the proportion of earnings paid as dividends to common

5 stockholders. This ratio, computed by dividing the dividend per share of common stock by the earnings per share reflects the dividend policy of the company (Marshall, McManus & Viele, 2004, p. 384). By using this calculation I have determined that my companied dividend payout ratio is 42%, as a rule of thumb, the dividend payout ratio for most merchandising and manufacturing companies is usually in the range of 30% to 50%, again my company showing an above average yield. Liquidity is measured in three principal ways, Working capital, Current ratio, and Acid-test ratio. Liquidity refers to a firms ability to meet its current obligations and is measured by relating its current assets and current liabilities as reported on the balance sheets. Working capital is the excess of a firms current assets over its current liabilities. Current assets are cash and others assets that are likely to be converted to cash within a year. Current liabilities are those obligations that are expected to be paid within a year, including loans, accounts payable, and other accrued liabilities. Most financially healthy firms have a positive working capital (Marshall, McManus & Viele, 2004, p. 74). By taking my companies current assets and subtracting the current liabilities, I have determined that my companys working capital is $1,965,396. The dollar amount of a firms working capital is not significant as the ratio of its current assets to current liabilities because the amount can be misleading unless it is related to another quantity. Therefore, it is the trend of a companys Current ratio that is most useful in judging its

current bill-paying ability. (Marshall, McManus & Viele, 2004, p. 74). By taking my companies current assets and dividing it by the current liabilities, I have determined that my companys current ratio is 3.1. The acid-test ratio, also known as the quick ratio, is a more conservative short-term measure of liquidity because merchandise inventories are

6 excluded from the computation. This ratio provides information about an almost worstcase situationthe firms ability to meet its current obligations even if none of the inventory can be sold (Marshall, McManus & Viele, 2004, p. 75). Using the calculation of adding my companies cash, cash equivalents and accounts receivable, dividing the total by my companies current liabilities I have determined my companies Acid-test ratio equals 1.1. As a general rule a current ratio 3.1 and an acid-test ratio of 1.1 are considered indicative of adequate liquidity. From this data, it can be concluded that my company should not have any trouble meeting its current obligations as they become due. In terms of debt-paying ability, the higher the current ratio, the better. Yet an overly high current ratio sometimes can be a sign that the company has not made the most productive use of its assets. In recent years, many large, well maintained corporations have made efforts to streamline operations by reducing their current ratios to the 1.0-1.5 range, or even lower, with corresponding reductions in their acid-test ratios (Marshall, McManus & Viele, 2004, p. 75). Activity measures focus primarily on the relationship between asset levels and sales (i.e., turnover). Inventory management is a very important activity for many firms, and many quantitative and operational techniques have been developed to assist in this activity (Marshall, McManus & Viele, 2004, p. 376). The general model for calculating

turnover is, Accounts Receivable turnover = Sales/Average accounts receivable, using this formula I have determined that my companies Accounts Receivable turnover average is every 9 days. By taking the cost of goods sold divided by the average inventory, I have determined that my companies Inventory turnover is every 14 days. In general, the

7 higher the turnover or the fewer the number of days sales in accounts receivable and inventory, the greater the efficiency. An increase in the age of accounts receivable, an increase in inventory relative to sales, or a reduction in plant and equipment turnover are all early warning signs that the liquidity or profitability of a firm may be weakening (Marshall, McManus & Viele, 2004, p. 379).. The Financial leverage refers to the use of debt to finance the assets of the entity. Two financial leverage measures, the debt ratio and the debt/equity ratio, are used to indicate the extent to which a firm is using financial leverage. Each ratio expresses the relationship between debt and equity in a slightly different manner. The debt ratio is the ratio of total liabilities to the total of liabilities and owners equity. The debt/equity ratio is the ratio of total liabilities to total owners equity (Marshall, McManus & Viele, 2004, p. 386). Using this formula I have determined that my company has a Debt Ratio of 19% and a Debt/Equity ratio of 32.3% which translates to a debt ratio of .32 for every dollar. As pointed out in the reading, most financial firms will have a debt ratio below 50% because of the risk associated with having a greater portion of debt in the capital structure. Expanding our Horizons into the Future as a phenomenon, Harley-Davidson (H-D) crosses many borders. They look to increase sales across the globe, in 2003, for

the 4th year running, H-D lead sales in Japan in the heavyweight category of motorcycle sales. Since 1908, law enforcement agencies have looked to H-D motorcycles to help them protect and serve. Today, Mexico City is home to the worlds largest fleet of H-D police motorcycles. Sales to police departments in more than 45 countries worldwide help H-D leverage brand awareness and build a strong consumer following. Eastern

8 Europe is a place where consumers have growing financial clout; H-Ds iconic status is creating opportunity. More than a dozen dealers-- up from 3 in 2001-- are bringing the H-D experience to enthusiasts. In Poland alone, H.O.G. membership has grown more than tenfold since 2000. Its the kind of appeal thats led to solid sales throughout Europe (Harley-Davidson Company). At the end of 2003, Harley-Davidson Inc. had set record revenue and earnings in the fourth quarter, even as new sales declined at the retail level for the second time in 12 months. Harleys profit increased 21% to $182.4 million, or 60 cents a share, from $150.9 million, or 49 cents, a year earlier. Revenue was $1.1 billion, up almost 13% from a year earlier. The increase was lead by a 15% gain in motorcycle revenue, as the company shipped about 17% more bikes than in last years quarter. The company increased its dividend for the 11th consecutive year in 2003 and doubled its quarterly payout in the fourth quarter. Since Harley-Davidson, Inc. became a public company in 1986, shareholders have enjoyed a compound growth rate of over 31 percent, along with five 2 for 1 stock splits. The Companys eighteen years of record revenue and earnings since its initial public stock offering in 1986 are the result of a combination of factors. These include the ability to deliver new products to market, attract new customers,

retaining existing ones and expand capacity in a responsible way (Harley-Davidson Company). When you consider my company has a debt ratio of 19%, Inventory turnover every 14 days and ROI of 17.3%, my company is doing exceptionally well. Unique marketplace events have also created special growth opportunities for Harley-Davidson.

9 With the price of gas on the rise, sales are at an all time high, more people are opting to commute on two wheels now more than ever. Based on long-term historical trend analysis, the Company believes that demand for Harley-Davidson motorcycles grows at an average core rate of 7% to 9% per year. However, in most of the 18 years since 1986, the Companys growth rate has exceeded this core rate, company officials estimate motorcycle sales will increase about 7% a year through 2007. The Company believes that its higher growth rate was driven by increasing market share, the stock market bubble including its associated wealth effect of the mid and late 1990s, and more recently, the excitement leading up to Harley-Davidsons 100th Anniversary (HarleyDavidson Company). The Companys growth since 1986 required several factory expansions, which provided the opportunity to thoroughly modernize and improve productivity, quality and manufacturing margins. As of December 31, 2003, the company had no material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment which generally have terms of less than 90 days. Based on all the information I have provided

in this report it is my opinion that Harley Davidson, Inc. is a solid company, with a solid future, and a solid investment.

10 References Marshall, McManus & Viele (2004). Accounting, What the Numbers Mean (6th ed). New York, NY: McGraw Hill Companies. Harley-Davidson Company. Retrieved 17 September, 2004, from the website: http://www.harley-davidson.com/CO/STU/en/h-dstudentcenter.asp